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The impact of stock options on risk-taking: Founder-CEOs and innovation

Michael Hickfang and Ulrike Holder

No 12/2018, Discussion Papers of the Institute for Organisational Economics from University of Münster, Institute for Organisational Economics

Abstract: This paper investigates whether and how founder-CEOs' risk incentives (VEGA) are related to firm innovation. We exploit a change in the accounting treatment of stock-based compensation under FAS 123R in 2005 to show a relationship between founders' risk-taking incentive and innovation. Using a sample of 226 firm-year observations between 2002 and 2008, we first show that stock options are incentives that encourage founder-CEOs to engage in risk-taking behaviour and that these were significantly reduced as a result of FAS 123R. Secondly, we find that innovation activities of the observed firms are significantly declining due to the reduction of the option compensation and the associated reduction in VEGA of founder-CEOs. Finally, our difference-in-differences approach provides strong evidence that there is a relationship between CEOs risk-taking and innovation output. Our results imply that even in founder-led firms it is important to incentivise founders' risk-taking behaviour in order that firms continue to innovate and remain competitive.

JEL-codes: D80 G30 G32 G38 O31 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-hrm, nep-ino and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:umiodp:122018

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